McGee: Pension plan fix is a sign of progress

The city must follow through on its $1 billion promise in obligation bonds in order to continue the positive change

By Josh McGee

June 8, 2017

These days, many people are sick of politics. They think partisan posturing and political gridlock make it impossible to get anything done. But local and state leaders recently proved those naysayers wrong. Our elected officials showed the people of Houston, and indeed the nation, that they can - and will - come together when the future of our city is at stake.

Rising pension costs could all but bankrupt Houston. The $8.2 billion pension debt is four times more than the city's total general fund revenue - and last year, Houston closed its books with an operating deficit for the first time in history. The city's estimates indicated that in order to deliver on benefit promises, its pension contributions would total nearly 60 percent of payroll for the police department and close to a whopping 70 percent for the fire department. Facing the prospect of massive tax hikes, sweeping layoffs and deep benefit cuts, the need for reform took on a new sense of urgency.

The entire Houston community - including area business executives, labor leaders, finance experts, members of the Houston legislative delegation and city officials - knew there was no easy fix. They would need to work together to make extensive changes in order to solve the problem.

Mayor Sylvester Turner made pensions a top priority during his first year in office. From the outset, he engaged police officers, firefighters and municipal employees in efforts to develop a solution. To their great credit, members of the police and municipal employees pension plans acknowledged that the current systems are unsustainable. They agreed to significant benefit modifications that will reduce pension costs and help keep the systems from going broke.

The Turner administration announced in September that it had reached a deal. However, the mayor did not have the authority to implement it because Houston's pension systems, like those in other major cities across the state, are controlled by the Texas Legislature. The city needed to navigate legislative politics in order to make changes. As the session progressed, there were attempts to remove key elements of the plan and even to kill the effort outright. Negotiations among legislators - some of who know little to nothing about Houston's finances - ran down to the wire. Finally, just days before the end of the session, state leaders approved the deal.

Houston's pension solution is one of the most comprehensive reform packages that we have seen, and legislators should be commended for supporting the local effort. It incorporates key elements of responsible reform that will help to stabilize the pension systems and provide safeguards to keep the city from accruing debt in the future. The measure also includes a pathway to place new employees in a "cash balance" plan, which would be simpler and easier to manage. Yet for all of its attributes, Houston's package will only work if everyone sticks to it.

The city, for its part, must follow through on its promise to issue $1 billion in pension obligation bonds to shore up the police and municipal employees systems. If it fails to issue the promised bonds, then many of the benefit changes would likely be rescinded and the associated savings would be lost.

Both the city and state need to scrutinize the pension funds' investments. Members will be taking on more risk under the plan, and our public officials must ensure that the pension boards are making prudent decisions that protect workers and limit costly fees. Legislators, meanwhile, should take note of Houston's responsible approach to pension funding. Texas should implement the best aspects of the plan, including minimum funding requirements, statewide. In addition, legislators should give cities, such as Houston, Dallas, San Antonio, Austin and Fort Worth, the flexibility to negotiate changes to their pension systems and the ability to implement those changes locally.

Clearly, there is a lot more to do - but let's take a moment to acknowledge the significance of what local and state leaders have accomplished. Despite opposition from firefighters, city leaders and members of the police and municipal employee pension plans put the collective good before their own interests. They took on a contentious issue and did what their predecessors could not do. In an era of political polarization, they set aside their differences and figured out how to not only pay down the debt, but protect the city's financial future.

As an economist with a focus on retirement security, I've worked with numerous cities and states facing similar pension challenges. They all want to know: How do we get people to come together and address this? I now have a new answer to that question: Look at Houston.

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